5 Comments:

The chart has an "observational equivalence" problem. The quantity theory says that inflation happens when money increases faster than output. The real bills doctrine says that inflation happens when money increases faster than the assets backing it. The chart can be explained by both views, and work by Bruce Smith, Thomas Cunningham, Thomas Sargent, etc., has favored the real bills explanation. At the risk of sounding pre-historic, economists should sometimes look at the LOGIC behind theories, and on that basis the real bills doctrine easily defeats the quantity theory.